The Interplay between Innovation and Production Systems at Various Levels: The case of the Hungarian automotive industry

Attila Havas

Institute of Economics, Hungarian Academy of Sciences

Budapest, Hungary

havasatt@econ.core.hu

Abstract

The paper first discusses alternative theoretical frameworks to analyse the impacts of FDI on host economies. Second, it provides an overview of major developments in the Hungarian automotive industry since the early 1990s, discussing both firm strategies and the macro level factors influencing the former ones, especially by highlighting the consequences of Hungary’s accession to the EU. A tentative taxonomy has also been developed, and applied when discussing the prospects for Hungarian suppliers. The paper concludes that diffusion models and the notion of sectoral system of innovation and production offer a more appropriate conceptual framework to capture the actual socio-economic impacts of FDI in this sector than the generally used spillover models. Notwithstanding the huge importance of globalisation, various elements and dynamics of national innovation systems still do matter. As for a major element of an NIS, namely government policies, it is more fruitful to create an attractive, favourable environment for R&D and innovation than focusing on the promotion of industry-specific R&D and innovation activities. It is also of crucial importance to co-ordinate several policies to enhance competitiveness.

1 Introduction1

Foreign-owned firms have already achieved a significant weight by the mid-1990s in the Hungarian economy for two reasons. First, privatisation techniques favoured genuine owners, who could afford to inject fresh capital – as opposed to the so-called voucher schemes, applied in other Central and Eastern European (CEE) countries – and these new funds were only available abroad. Second, investment promotion policies – e.g. tax holidays, infrastructure and human resource development projects largely financed by public money – also attracted foreign investors. The share of foreign-owned firms has become extremely high compared to OECD member states: their share in total manufacturing revenues was 71.6% in 2002, surpassed only by Ireland (79.5% in 2001) among the OECD countries. Just to indicate how extreme these two countries were in this respect, Belgium, with a much lower share of ‘only’ 57.2% (2002), ranked 3 on this list. The only other country above the 50% mark was Canada (51.0% in 2002).2 There was only a single country in the range of 41-50%, namely the Czech Republic (45.5% in 2002); while five countries registered a share of foreign-owned firms above 30% by 1999-2002: France, the Netherlands, Poland, Sweden, and the UK (in alphabetical order). (OECD STI Scoreboard 2005, Table E.6, p. 202)

The amount of foreign capital invested in Hungary also indicates the significant role of foreign-owned companies: FDI amounted to €3.3 billion in 2004, and 2005 saw an even larger inflow of capital, that is, €5.3 bn. In absolute terms, Hungary was second only to Poland concerning cumulated FDI inflow: $61.2 bn vs. $93.3 bn by 2005. (UNCTAD) Thus, FDI stock per capita was $6,122 in Hungary in 2005, ranked between Estonia: $9441.5; and the Czech Republic: $5829. (own calculation based on UNCTAD data). Thus, globalisation has become a key issue both for economists and policy-makers in Hungary.

An important strand of literature has long focussed on the motivations of investors. The most widely accepted concept, the so-called eclectic paradigm, developed by Dunning, is distinguishing market-, resource-, efficiency- and competence-seeking investment projects. More recently, it has become an equally important research question to assess the impacts of FDI on local firms. To what extent and through what channels are foreign-owned companies contributing to the re-structuring of the domestic industries? Do they enhance the competitiveness of indigenous firms by bringing technological and organisational innovations in, or do they have a negative effect, e.g. by forcing some of the domestic firms to exit?

Given the extremely high weight of foreign capital in Hungary, these research questions are of high importance, and automotive industry offers an excellent opportunity to tackle them. This industry has traditionally been a front-runner in globalising its activities, originally in the forms of trade and licensing agreements, as early as the beginning of the twentieth century, and then in the form of cross-border investment projects. The main drivers for the major automotive firms are cutting costs via re-location of production, and gaining access to new markets in emerging economies. They have become quite active in Central Europe, too: practically all major automotive groups, both assemblers and component manufacturers, have already set up their operations in Central Europe, or are building their new plants. (Havas, 2000a, 2004; Pavlinek 2002a, 2002b, 2005) Given these strategic moves, the Hungarian automotive industry has been radically re-shaped: car production started again in Hungary in the early 1990s – after a half-a-century ‘recess’ –, and suppliers became parts of the global production networks, either via ownership or subcontracting relationships. In brief, new products are manufactured by new entrants or fundamentally transformed incumbent firms, using new production and management techniques, and serving new customers.

The aim of this paper is to shed some light on this sweeping re-structuring process, focusing (i) on the role and impacts of production networks, co-ordinated by major foreign firms; (ii) on prospects and modes of growth; and (iii) on the scope for innovation policy. It is based on interviews with managers, both at foreign-owned and domestic firms, and simple sectoral statistical analyses. The remaining parts of the paper are organised as follows. Section 2 discusses alternative theoretical frameworks to analyse the impacts of foreign-owned companies on domestic ones, namely spillover vs. diffusion models, as well a new concept of the evolutionary economics of innovation, that is, sectoral system of innovation and production. (Malerba, 2002, 2005) Analysing historical trends can help in achieving a better understanding of current developments. Therefore, Sections 3-5 summarise the evolution of the automobile and auto parts industries in Hungary, as well as major developments since the late 1980s. Competition patterns and the role of production networks are then discussed in Section 6. The following section shifts the focus of analysis from the present to the future by looking at the different modes of growth and the prospects for the Hungarian suppliers. Finally, theoretical and policy conclusions are drawn in Section 8.